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How The ONE Loan Goes Too Far

Blog Post

Dec. 12, 2017

Congressional Republicans have put forward an ambitious bill to reauthorize the Higher Education Act, with severalcontroversialproposals that could have major implications for higher education’s future. Among these, the bill proposes sweeping changes to the federal student loan system, including capping annual borrowing for graduate and parent borrowers (currently limited only by the cost of a student’s education) and virtually eliminating forgiveness provisions for borrowers who repay their loans based on income rather than the amount they borrowed for school.

Combined, these proposals seek to address the joint problems of unlimited loans combined with generous forgiveness mechanisms, which are costly to taxpayers and can create bad incentives for students to overborrow and institutions to overcharge. But such changes also come with major downsides: Attempting to root out excessive borrowing by making the loan program less generous will also discourage enrollment and borrowing among risk-averse individuals, and hamper the borrower safety net that exists to protect those who do enroll only to see their educational investments fail to pay off.

Capping student loans would limit how much debt an individual can take on for school, and by extension how much can later get forgiven.* But adding caps on loans to parents and graduate students would mean prospective students have less cash on hand to pay for school, pushing more students into the private market for loans for both graduate and undergraduate education. As a result, many students will forego education altogether or end up taking on loans with worse terms. The impact of this change cuts both ways. Some schools may be able to adjust their pricing strategies in light of the new reality in which their students can borrow less from the federal government. However, some low-income or otherwise marginalized candidates will also skip out on education once private lending becomes necessary to pay for school, a reality with deep implications for equity in higher education.

In addition, under the proposed law, students who take on debt disproportionate to their future earnings will end up repaying their loans in perpetuity under the new income-driven repayment plan--in extreme cases, well into their retirement. Borrowers could fall into that trap because they don’t finish their degrees because they are unable to work due to unforeseen circumstances, or simply because they were poorly informed about their future employment prospects. In contrast, the current system forgives unpaid balances after a specified number of years, effectively absorbing a significant portion of the downside risk for student loan borrowers.

While the proposed bill does include cancellation for interest that accrues in excess of the principal balance plus interest that would have accrued under the standard repayment plan, this is not necessarily helpful for borrowers whose incomes are chronically below the poverty line. (While such cases would hopefully be extremely rare, students who borrow the proposed maximum for undergraduate education of $60,250 and make the minimum $25 payment under the proposed income-driven plan would need nearly 300 years to finish repaying their loans, while even those with marginally higher incomes may never be able to repay their loans.) Thus, eliminating forgiveness, much like capping graduate loans, has two unavoidable and deeply intertwined results: Some borrowers will make more realistic borrowing decisions, either through selecting programs with higher expected earnings, lower costs or both; however, in extreme cases, some borrowers--those who are the most vulnerable--will remain in debt for their education for the rest of their lives.

The tradeoffs in both cases are real and unavoidable. Unlimited access to debt that will later be forgiven desensitizes students from the impact of their borrowing, which in turn allows schools to develop and sustain programs that may not be economically viable given their relative cost and value to students. Yet capping graduate and parent borrowing and eliminating forgiveness provisions both aim to solve the same problems, while creating distinct spillover effects that harm student borrowers. Such a move both reduces access to education and increases the expected costs that individual students must bear, even in very extreme circumstances.

Given these realities, simultaneously capping loans and eliminating forgiveness provisions is both duplicative and somewhat cruel. Removing forgiveness while allowing students to borrow however much they need would discourage high debt loads since students will be on the hook for the entirety of what they borrow. But it would also ensure students who need access to funding are able to invest what they need to pursue particular degrees, regardless of credit history or family income. On the other hand, capping loans while leaving forgiveness in place would prevent students from borrowing large sums while still allowing for protections for those students for whom higher education does not work out. Neither is a perfect solution--but combining both is unnecessarily harmful to student borrowers and place equitable access to higher education at risk.

* This would be particularly critical for graduate education, where borrowing is virtually unlimited, and borrowers can receive forgiveness after 10-25 years of income-driven repayment. However, because parents can also borrow up to the cost of attendance for their children under the current law, capping parent loans would have similar consequences for undergraduate students’ access to capital.